China's patent EXPLOSION could leave West behind

Analysis No one should be in any doubt that patents are a key part - if not the key part - of any strategy to gain or hold market share in tech industry.

Google is scrambling to cover its arse with hauls of patents from IBM and Motorola Mobility, as the smartphone and fondleslab patent wars scale new heights in courts in Europe and the US.

Nokia, a company many commentators have already written off in the mobile phone world, managed to win a patent case settlement from the litigating juggernaut Apple, which is otherwise gunning for Android manufacturers. Although figures have never been confirmed, Nokia's quarterly report that followed the case in July had a settlement income of €430m, widely assumed to be mostly an Apple contribution. And the iPhone maker will continue to pay royalties to the Finnish former phone leader every time a panting fanboi gets their hands on a Jesus mobe.

Nokia is not out of the woods yet, as that same quarterly report showed, but right around the corner is the lovely LTE standard for 4G phones, a standard that will give the firm 1.5 per cent to 2 per cent royalties on each FRAND (fair, reasonable and non-discriminatory) licence of the technology, according to a press release in 2009 (which is now mysteriously missing from Nokia's website, but is quoted in a number of papers, including this one).

Whether or not it is making handsets, Nokia's going to be making money from phones, along with companies you may recognise from other patent litigation, including Qualcomm, Motorola, Ericsson, Huawei and ZTE.

But it's not just high-tech companies that are watching the patent wars with avid attention. Countries are waking up to the economical advantages of patent ownership as well, and one in particular is looking to fill up its arsenal, fast.

China: enter stage left

China, traditional home of the cheap knock-off, is moving from copycat to innovator, according to statistics (PDF) from the World Intellectual Property Organisation, which collects data from the Patent Cooperation Treaty (PCT).

In 2010, East Asia overtook North America and Western Europe to become the subregion accounting for the most PCT filings, while the economic downturn caused a slowdown in the traditionally patent-prolific West:

From 2002 to 2010, the average annual growth rate of East Asia was 15.1 per cent, compared to 1.1 per cent for North America and 3.1 per cent for Western Europe.

Indeed, since the economic recovery that followed the dot-com recession, the major East Asian Filers – China, Japan and the Republic of Korea – experienced particularly rapid growth in applications. They continued to increase their filings even during and after the most recent economic downturn – unlike North America and Western Europe.

And these stats might not even reflect the half of the patents China is accumulating:

East Asian countries still rely less on the PCT system for their filings abroad than do the US and Germany. China’s participation in the PCT system is still relatively young. As China’s economy further develops and applicants gain experience with the international patent system, its PCT filings may well generate more national phase entries.

Recent reports have speculated that China is losing its crown as the low-cost king of manufacturing, with rising wages and an ageing population combining to make outsourcing companies start looking in other Asian economies for their cheap labour.

But China is holding on to its reputation for producing consumer electronics, and the shift from general manufacturing to high-tech is all part of the plan - the Five-Year Plan of the government.

In the 12th iteration, China's government has laid out its intention to turn its coastal regions from the "world's factory" to hubs of research and development and high-end manufacturing.

The Chinese are interested in high tech, they're interested in green tech and the government is putting up the renminbi necessary to encourage innovation, according to a presentation by Gordon Harris, a partner at international law firm Wragge & Co. Harris heads up intellectual property at the firm's China office.

Encouraging patent filing

Speaking at the International High-Tech Patent Litigation Conference in London this week, Harris said China was "filing a lot more patents, with increasingly strong products and processes behind them". And the government is encouraging individuals and companies to do so by paying them when they do.

"The government's Five-Year Plan looks to increase filings from 1.75 per 10,000 people to 3.3 per 10,000 people," he said, adding that when you thought about the population of China (1.3bn), that was a lot of patents.

As well as stocking up on its own patents, China has been dipping its toe into the world of international litigation, with one of its top Guangdong province powerhouses, Huawei, taking Motorola to court in the US, and winning.

China itself has adopted its patent litigation procedures mostly from the German system, so they're well-equipped to deal with IP-infringement issues at home and abroad.

But litigation is not the main aim of the game for China's patent pile-up, in fact around 90 per cent of the IP cases in the country are Chinese companies duking it out amongst themselves, according to Harris.

China doesn't want to be winning patent cases, it wants to be the inventor.

"The first question I get asked about patents in China is how to protect against non-practising entities (NPEs*)," said Harris. "The second question I get asked about is standards."

Shenzhen's titans Huawei and ZTE aren't litigating their way to lolly, they're getting involved in the basic technologies that all devices will have to use. In fact, you might recognise their names from the list of tech firms that already stand to benefit from the licence for LTE.

Right now, China's playing with the other kids and getting involved in worldwide standards that feature US and European companies as well. But "Made in China" could soon take on a whole new meaning as the country pours its resources into the research and development that Western governments can ill afford and making its companies a more attractive prospect for corporate investment.

An example of this is BYD Company, also from Shenzhen in Guangdong, the major manufacturer of rechargeable batteries that has a keen interest in the automobile industry. The company is one of the top four rechargeable battery manufacturers in the world and in 2009 the acronym for its Chinese company name got a new meaning – Bring Your Dollars – when Warren Buffett's investment vehicle Berkshire Hathaway bought 10 per cent of it for $230m.

So why was Buffett interested in an at-the-time obscure Chinese tech firm? Electric cars is why.

BYD Automobile is looking to take its battery know-how into producing all-electric cars that go for more than a few miles and take less than a few millennia to recharge, and it has the investment at home and abroad to have a more-than-decent chance of succeeding.

For consumers, all of this is great. As long as you don't mind who makes your electronics or where, any and all competition is a good thing because it can only lead to better products. But China's shift into high-tech R&D and its patent pile-up should give Western governments pause for thought.

A large part of the West's former economic supremacy lay in its technical superiority and the investment in innovation that ensured it stayed on top. It is no coincidence that the last Western economic superpower was America, birthplace of the internet.

In the most recent downturn, one of the few industries to escape relatively unscathed was the technology sector. Not every company survived and some are much reduced from what they once were (we won't point fingers), but technology was nevertheless an important prop to ailing economies.

Sure a lot of Western companies' manufacturing happens in China already, but the products, and the profits, return to the original company and thereby the home economy. If Asia is doing all the manufacturing and China is coming up with all the technology, while the Middle East uses its oil money to invest in financial centres, you have to wonder what exactly US and European firms are going to be doing. ®

Bootnote

* NPEs (non-practising entities) are companies that hold patents but don't manufacture anything that uses these patents. In some cases, these companies come about because they get squeezed out of, or voluntarily leave, the market for the device their patent is for, but their patents still get used by other manufacturers. The situation also occurs when companies sell their intellectual property assets to get some readies or when firms go bankrupt and their assets go on firesale.

Recently, some NPEs have earned the new and uncomplimentary moniker of patent troll. This is basically a firm that only acquires or files for patents so that it can sue for infringement and royalties. The company targeting mobile app developers – Lodsys – is a recent famous example of a firm accused of this.